Did you ever have an ant farm when you were little? An ant farm makes the ants' behavior easily visible and controllable. They are imprisoned in a two-dimensional world in which their decisions are limited and their needs are met by you! They can only go side to side and up and down. And up usually leads them to the leaf you dropped into the ant farm for their lunch! But in the wild...

Ants form highly organized colonies which may occupy large territories and consist of millions of individuals. These large colonies consist mostly of sterile wingless females forming castes of "workers", "soldiers", or other specialized groups. Nearly all ant colonies also have some fertile males called "drones" and one or more fertile females called "queens". The colonies are sometimes described as superorganisms because the ants appear to operate as a unified entity, collectively working together to support the colony. (Wikipedia: Ant)

A superorganism is an organism consisting of many organisms. This is usually meant to be a social unit of eusocial animals, where division of labor is highly specialized and where individuals are not able to survive by themselves for extended periods of time. Ants are the best-known example. The technical definition of a superorganism is "a collection of agents which can act in concert to produce phenomena governed by the collective," phenomena being any activity "the hive wants" such as ants collecting food or bees choosing a new nest site.

Superorganisms exhibit a form of "distributed intelligence," a system in which many individual agents with limited intelligence and information are able to pool resources to accomplish a goal beyond the capabilities of the individuals.

Nineteenth century thinker Herbert Spencer coined the term super-organic to focus on social organization... Similarly, economist Carl Menger expanded upon the evolutionary nature of much social growth, but without ever abandoning methodological individualism. Many social institutions arose, Menger argued, not as "the result of socially teleological causes, but the unintended result of innumerable efforts of economic subjects pursuing 'individual' interests." (Wikipedia: Superorganism)

Methodological individualism does not imply political individualism, although methodological individualists like Friedrich Hayek and Karl Popper were opponents of collectivism. Detaching methodological individualism from political individualism... if a properly-functioning communist regime were to arise, it too would have to be sociologically understood on methodological individualist principles. (Wikipedia: Methodological Individualism)

Hopefully I didn't lose you yet. I know, I'm supposed to be distilling not mixing, but I needed to draw the connection between ants and economics. Did you get it? Ants are dumb little creatures by themselves. But even as dumb as they are, some are more skilled at smelling and finding food while others are better at fighting, and some others are really strong, for carrying food back to the colony for lunch.

And in a wild colony of ants these individuals end up specializing in what they do best which leads to a collective intelligence far greater than the intelligence of any individual ant...

__________________________________________________________

And while we're on this subject, here's another must-read:

“I, Pencil” Revisited

By Sheldon Richman
Published: 16 January 2009

Leonard Read’s classic essay, “I, Pencil,” which is now 50 years old, is justly celebrated as the best short introduction to the division of labor and undesigned order ever written. Read saw an “extraordinary miracle … [in the] the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding!”

His subject and its relation to freedom and prosperity were certainly worth capturing in such a clever, pleasing, and illuminating essay, which is why it is one of the best-known works in the popular free-market literature.

But there’s another lesson in “I, Pencil” that has been largely overlooked, perhaps by Read himself. “I, Pencil” is also an excellent primer in the Austrian approach to capital theory. It’s worth looking at Read’s essay in that light.

Early on, Read’s pencil describes his family tree, beginning with the cedars grown in northern California and Oregon that provide the wooden slats. But he doesn’t really start with the trees. He notes that turning trees into pencils requires “saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding,” and those things have to be produced before a pencil can be produced. “Think of all the persons and the numberless skills that went into their fabrication: the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls, the cookery and the raising of all the foods. Why, untold thousands of persons had a hand in every cup of coffee the loggers drink!”

What emerges here is what Austrian economists call a structure of production. This structure is characterized by two closely related elements: multiple stages (distinguished by their “distance” from the consumer) and time. The pencil that eventually emerges at the end of the process must first proceed, in various states of incompleteness, through a series of stations at which components are transformed in ways consistent with making pencils. The stations themselves have to be prepared through earlier stages of production. Thus before trees can be cut down and turned into wooden slats, saws, trucks, rope, railroad cars, and other things must be produced first. Before steel can be used to make saws, trucks, and railroad cars, iron ore must be mined and processed. And so on. The same kind of description can be provided for each component of the pencil: the paint, the graphite, the compound that comprises the eraser, the brass ferrule that holds the eraser.

Tracing the pencil’s genealogy back to iron, zinc, copper, and graphite mines; hemp plants; rubber trees; castor beans; and much more demonstrates the “roundaboutness” of production, the term of the early Austrian economist Eugen von Böhm-Bawerk. Much time and effort are spent not on making pencils but rather things that will–sooner or later–help to make pencils. Without central direction, entrepreneurs set up production this way because more, better, and cheaper pencils can be made more profitably than by some more direct process.

Price Communication

Several things are worth pointing out about the structure of production. First, while no central planner is responsible for pencil production overall, entrepreneurs and workers at each stage do have plans and expectations, which they strive to coordinate with one another across stages and time periods. The key to coordination is the price system. If there’s a brass shortage, rising prices will communicate that information to the ferrule and pencil makers. The downstream entrepreneurs will have to adjust their plans in response to the new conditions–say, by finding a substitute material. The demand for a substitute material will in turn set appropriate processes in motion as entrepreneurs react. In the real world of disequilibrium, change is the rule, so plans are always undergoing revision…Continue reading

152 comments:

I understand that the European CBs are no longer backstopping the BBs. But what about the Treasury? What would prevent the Treasury from using the U.S. gold stash to backstop the BBs for a long, long time? If Geither has found a way to do this on the sly, could this not push our Freegold a long, long time? And does anyone doubt that Treasury would hesitate to do this to defend $IMFS?

Yes, "Life on the Ant Farm" is one of the greatest prospects on how to take an approach on considerations.I guess that by now everybody is convinced the freegold system ensures that savers (in the monetary plane) can not be robbed.But: What's about the physical plane underneath? Is there an automatism that the physical plane will prosper (therefore the savers in the monetary plane will actually benefit from the savings physically)?I am not really that convinced that this automatism will develop. Sure, it is always a question how to define "benefitting physical plane".If somebody trades his kidney for an ipad, what does that tell us?http://www.bbc.co.uk/news/world-asia-pacific-13639934Is that really an austrian win-win-trade? Who knows...

Anyway: I come often to the conclusion that it would benefit the superorganism much more, if decision makers can be held responsible for their actions. In earlier days everybody had a gun in his desk, for his own personal bankruptcy judgement day. Maybe not so bad for the superorganism after all ;)Greets, AD

I'm tried of that Euro stuff. As long as we have Euro, there wouldnt be RPG and consequently no Freegold evolvement inside the Euro-Zone, because you will always have financial industry and government tempted to borrow/lend (and in the end nobody is RESPONSIBLE!!!) PERIOD.

Can we now stay with this new topic, I am happy it does not talk about Euros, yes?Greets, AD

No loud mouth we are not going to ignore your earlier comments. We are going to fully explore them partly because of your latest contribution to this blog:

I'm tried of that Euro stuff. As long as we have Euro, there wouldnt be RPG and consequently no Freegold evolvement inside the Euro-Zone, because you will always have financial industry and government tempted to borrow/lend (and in the end nobody is RESPONSIBLE!!!) PERIOD.

Can we now stay with this new topic, I am happy it does not talk about Euros, yes?Greets, AD

I'm tried of that Euro stuff. As long as we have Euro, there wouldnt be RPG and consequently no Freegold evolvement inside the Euro-Zone, because you will always have financial industry and government tempted to borrow/lend (and in the end nobody is RESPONSIBLE!!!) PERIOD.

HAHAHAHAHHA omg I am dying right now!!!!

OK OK, either this is actually a serious comment... in which case wow... you are really not familiar with the concepts presented on this here blog.

The other possibility is that this was just a really good troll, in which case I salute you sir, you really got me. You are a troll extraordinaire!

If you think freegold will prevent financial industry/Govt from borrowing and lending, you are sadly mistaken.

Nothing will prevent that. Not even Gold standard. The govt will devalue their own currency at the first necessity. This is what they have always done. This is what Rome did, this is what US did. So get over it.

Freegold allows you (an individual) to save yourself from this trap. Get some gold. People who cannot understand this are bound to get sucked in to that trap and nobody can do anything about it. Not that you need freegold for that.

Freegold only ensures that nobody is manipulating the price of gold. But I am not sure if that in itself is not a utopia :-). Ultimately we may get somewhere near to the ideal of freegold for some time. It will not stay in that state for a long time. Human nature is like that.

What you are wishing for is Utopia. It does not exist and it cannot exist. Not in this world.

I hope we can have more relevant discussion from you, rather than rants about how freegold wouldn't do what you want.

Oh, but the limits of online communication are truly something to behold. Franco, I put the word theory in quotes for exactly the opposite reason you suppose. To label PO a theory seems like nothing less than a way to undermine the veracity of PO as a living breathing phenomenon that, while complex, is indisputable. This is the case unless one is a proponent of abiotic oil, which I most definitely am not.

But when the debtors are borrowing too much currency and consuming too much in the physical plane, there is a mechanism in Freegold that ultimately slows them down. That mechanism is the purchasing power of the currency. When the debtors are consuming too much they'll experience price inflation which will force them to consume less. So it is the purchasing power of the currency that regulates the debtors.

Freegold simply offers a different way of controlling credit expansion that is more effective than the modern Austrian suggestions of making money harder and/or limiting or eliminating fractional reserve banking. There is no need for all that convolution, just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch (which comes from this comment by yours truly). Snippet:

But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system.

It is easy to blame this on debt as a principle, but unless you don't mind being wrong, there are some deeper explanations out there. Debt under Freegold will not reach such destructive levels. "Easy money" thinkers may or may not get their debt-free money, but if they do they will suddenly realize the flaw in their reasoning. Oops! That it can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands. Without that, socialist welfare expansion will simply dilute the value of the currency and be as limp as a eunuch.

Europe was just fine, before EMU was abandoned and CB crooks like ANOTHER appeart on the scene. Simple as that.

Remember who got Greece into the EURO? GoldmanSachs. Where did ECB head Draghi worked before? GoldmanSachs. Where did "Three Card" Monti worked before? GoldmanSachs. Where did Papadimos worked before? FED&GoldmanSachs.

With every additonal fire in Athen I will salute to the message of the Euro and those smart people, shall debtors and savers live in peace. Good job, thanks alot to all those smart people.

Let's put it like that: I dont need to understand and you dont need to explain, watching the fires is just fine and warm.

Yep.. Mind closed = case closed. I wouldn't recommend wasting time on AD when there are others here willing to engage and learn. Thankfully we have the power to skip over troll-boy's comments. Eventually it will go away, or maybe at least shut up for a while and do some "thinking".

Peak oil, abiotic oil... I never get too involved with either concept. Think long-term and you will see it wont much matter in our lifetime. New technologies... the evolution cannot be halted.

Of course we'll still need oil through the transition, but its utility will become limited and concepts like EROI will become irrelevant. In less than a year we will have at least one technology on the market which will make heating oil(fuels) obsolete. As it progresses it has the potential to do much more.

I am interested in the question of a human superorganism (as a theory) and its intersection with meme theory (thoughts/habits/customs reproducing themselves with human central nervous systems as the medium).

The Century of the Self, in part, describes the consequences of "fads" in popular theory of human psychology and the consequences of the unilateral use of mass media. Some bloggers put forward the assertion that the internet undercuts the power of mass media by allowing peer-to-peer communication in real time over vast distances, but there are others that point out that blog visitors self-select, and the internet therefore can act as a giant mirror, reflecting only the presuppositions of the user.

What are the consequences of the internet for meme propagation and survival? What are the consequences for the superoganism?

@JR re your 06:59"just separate the store of value so it cannot be fractionalized and then non-productive credit expansion will be as limp as a eunuch..."

What I am having great difficulty working out is how exactly the Freegold environment would have prevented the non-productive credit expansions like in Ireland (property)and Greece (consumption) over the last say 10 years.Are you saying that these countries would have been constrained by Freegold? How so? They are in the Euro.Or, maybe that each country should go back to having its own currency that would devalue against Freegold?If so, then should we forget the Euro?I can see how Freegold would work for large trading blocks like USA/Euroland/China but how would itwork (have worked) for Ireland/Greece within the Euro?Please give me a link if these points have already been answered. Thanks a lot.

Abiotic oil or not, it doesn't matter really. All that matters is rate of production. It's undisputed that production in the big, easily exploited fields has waned precipitously. PO is, therefore, current reality. Some other technology effectively replacing oil and its derivatives within a reasonable time frame (say 20 years) seems doubtful to me.

In a future post I plan to delve into the vital and delicate relationship and balance between base money and bank credit money and how it affects the value of our money in terms of its ability to lubricate commerce. But for now, I have a couple of questions for you to ponder.

In thinking about the money supply (cash and credit inclusive) that is actually in the economy, would you count cash that is stacked up inside an ATM as part of that supply? Here's a hint: That cash is not in the economy until someone withdraws it from the ATM. If you count it while it's still inside the ATM then you are double counting that money.

Is it a positive sign for the future when there are $Trillions in savings sitting in cash and near cash equivalents? All that money must mean we are loaded, right? It must mean our cash dollar is strong which implies the market thinks it will be that way in the future, right? If $Trillions are good, wouldn't $Quadrillions, $Quintillions or $Sextillions be that much better? And with this thought in mind, does a rising amount of savings crowding into cash and near-cash equivalents represent a positive or negative view of the future?

Those super-low rates at the short end of the yield curve represent really big money, too big for FDIC protection, that just wants to save itself. It is big money that, like Bill Gross says, is far more concerned about the return of money (purchasing power preservation) than the return on money (yield). That short end is an awfully crowded place in the land of ZIRP forever and monetary evolution, especially when you consider the time factor. (H/T OBA)

Of course, what I have described above is a simple model. The reality will be a bit more complex. For instance, gold will have some competition although it will be tiny in comparison to today. Some government debt will likely compete for your savings. But the US government, for example, will have to compete just like the Greeks do today. And we will still have a much more limited menu of investments and trading opportunities to lure you into putting your hard-earned savings at risk.

Bill Gross is in the business of helping savers lend their savings to debtors through the use of bonds. And he has done very well in this business, which is why he is acutely tuned in to the implications of zero interest. With zero interest, you can't earn a yield or a capital gain as you can when interest rates are high and falling. And so there is no reason for savers to lend money to debtors for the longer terms necessary in order to run an economy. In fact, it is terribly risky for savers to do so in a zero rate environment.

The New Normal

There is no "fiat management" solution for the problem Bill describes. The savers simply cannot lend their savings to debtors anymore in a way that is beneficial to both the economy and the savers. Even the King of the bonds himself is sounding this alarm.

[...]

So in today's system, securitized debt is the way various tranches of debtors bid savings away from the savers. And over the three or four decades in which this has been the norm, a strange concept has grown into nearly universal acceptance. That is the idea that savers have a moral obligation to society to lend their savings to the debtors, and that by hoarding gold instead, you are somehow depriving society of your vital net-production. An absolutely ridiculous, bass-ackward notion!

[...]

In fact, my crystal ball informs me that it is the savers lending their excess production directly to the debtors that allows for the perpetual deficits we struggle with today.

I think that if we look closely at how the debtors use the fiat money system with and without the assistance of the savers, it will become clear that we will all be better off with a bifurcated monetary system. And it will certainly be clear that the savers have no business taking debtors on as the counterparty to their savings.

"But debt itself is not the cause of our problems today. Today we have a situation where the vast majority of excess production value (excess capital) is enabling massive amounts of global malinvestment through new debt creation. That has peaked and is now contracting. But the problem is not the debt itself. The problem is the enabling effect of excess capital not having a viable alternative that floats against the currency. The problem is the lack of the adjustment mechanism of Freegold. There is no viable counterbalance against uncontrolled debt growth today. So we are only left with credit collapse and hyperinflation of the monetary base to clear the malinvestment from the system."

Currency can only have expandable value (needed for the welfare state) if producers are willing to hold it while it expands, yes?

ChrisFWhat I am having great difficulty working out is how exactly the Freegold environment would have prevented the non-productive credit expansions like in Ireland (property)and Greece (consumption) over the last say 10 years.

Currently, the non-productive credit expansion is the only way to save excess production. Freegold will compete with that and temper all credit expansion.

I can see how Freegold would work for large trading blocks like USA/Euroland/China but how would itwork (have worked) for Ireland/Greece within the Euro?

I think if you focus on how debtor countries get funded currently (bond issuance) contrasted with how creditor countries 'save' currently, you will find that Freegold will be competing against the debt for the producer's excess. Further, if you have gold flowing in to your country, your interest rates will be declining as your bonds look safer, thus expansion in the producing economy. So if you want credit, you better be producing. Otherwise it'll cost ya.

That's how my simple mind sees it anyways.

*And I see in preview that JR will have answered this better than my attempt.

" Private debt is created by banks expanding their balance sheets. Some of it remains on the bank balance sheet and some of it is sold to savers like you. Securitized and sovereign/public debt is the $IMFS proxy for gold.

[...]

Any financial advisor in today's $IMFS can explain the reasoning behind investing in fixed income securities also known as bonds. They are for risk-averse investors looking for a constant and secure nominal return on their investment. In theory, the safest bonds will deliver a nominal return equal to the purchasing power your principle investment loses to inflation over time. So, in theory, the safest bonds are supposed to do what gold will in fact do in Freegold, perfectly preserve your purchasing power over time.

How can gold perfect the preservation of purchasing power you ask? It's quite simple really. It will come from a global shift in perception as to the very reference point for purchasing power. What is the benchmark for purchasing power today? The Big Mac? Ha! Think about that one and get back to me. In the meantime, check out my post Reference Point Revolution!

So in today's system, securitized debt is the way various tranches of debtors bid savings away from the savers. And over the three or four decades in which this has been the norm, a strange concept has grown into nearly universal acceptance. That is the idea that savers have a moral obligation to society to lend their savings to the debtors, and that by hoarding gold instead, you are somehow depriving society of your vital net-production.

[...]

The placement of gold in the "before" really doesn’t matter for our purposes right now. It could be in either plane or both. But in the "after" it has filled and replaced the arena formerly occupied by derivatives, securities and paper trading wealth in general (securitized debt). "Glimpsing the Hereafter

You seem to be under the impression that lent money must come from the savers' savings. This is not how it works in a purely symbolic fiat currency system like we have now... and like we'll have in Freegold. Credit money is borrowed into existence from the banks. This is what banks do. They expand their balance sheets to satisfy the debtors and for that risk they earn interest. They take the debtor's promise onto their ass(ets) and create liabilities that can be spent like base money created by the government.

This system will continue in Freegold with the exception of the securitization process. The securitization process allows the banks to offload their assets (risks) to savers relieving them of the need for future prudence. Securitization, or structured finance, was born in the 1970's, expanded beyond mortgages in the 80's, institutionalized for sub-prime debtors in the 90's and blew up in the 2000's. Outside the US, this process was more than a decade behind, only emerging in Europe in the 80's.

So private debtors will only be set back 15 to 30 years at most, not centuries like you imply.

Governments, "the other debtors," have three different ways to get their money. They can borrow by issuing bonds, they can print expanding the monetary base, and they can tax the economy. In Freegold the raw printing will be curtailed because they will find it in their best interest to do so. As for the borrowing, the US will still borrow the same way the rest of the world has had to do it for the last century. Only the US exorbitant privilege will be gone. And as for the taxes, they will ultimately increase as the economy is revived through Freegold. Gold will not be taxed, mind you, because it will be the base capital upon which orders-greater taxable trade is built.

You must understand that savers don't save everything they earn. They spend most all of it. More than 90%. The countries with the highest savings rates are usually around 10%. This is part of the reason that fractional reserves can work, except in times of great economic growth where savings overtake monetary reserves and create monetary deflation. And this is exactly why it is better to have the link severed between savings and money.

The term FREEgold seems to be hopelessly confusing a great many of you, especially the ones suffering a myopic obsession with the "elite." So I would like to suggest a new name for this system, which is not really a system at all. It is more like the lack of a system: the dollar reserve system and the paper gold system. Without them, Freegold is what we have, along with whatever "system" develops. It is not something the debtors or the elite can fight. It's just a shift in the perception of savers. Can't change that.

So here's the new name I propose: CrackWhoreGold. Maybe this way all you NWO-types will stop associating it with whatever utopian concept you think TPTB will never let you experience. CrackWhoreGold works very well actually:

1. Always available at the right price.2. Will go with any guy (or gal) regardless of nationality (subject to 1 above).3. Gets high whenever possible and tries to stay high.4. Has a pimp called Uncle Sam who wants her down on "the Street".5. Milks big spenders for everything she can get but ultimately prefers the company of rich patrons.

So from now on, when you "elite-ophobics" come at me with something like ShamefulPath did here: "Freegold is like Valhalla to savers...", I'm going to insist that you call it CrackWhoreGold instead: "CrackWhoreGold is like Valhalla to savers." Maybe it'll make you think things through a little.

I do plan on making the 20 or 30 bagger capital gain on the revaluation of gold. Call me a speculator if you want but thats the plan.

Then I am going to sell some of this gold to in the most tax friendly place to someone who needs it more then me. Probably to a person that already has enough assets to live on without working, plus has excess production to save. My goal is a modest retirement, even if it means I consume most of what I produce (without working.)

I am already looking at quality industrial buildings that I know are owned by over-levered fools. During and after the collapse, these assets will be dirt cheap, priced in gold for a period of time.

I need the income producing asset to live off of so I must sell my gold. The businessman that is already financially free, needs my gold more then I do.

"If you think freegold will prevent financial industry/Govt from borrowing and lending, you are sadly mistaken."

Thats bullshit. Look at a place like Jamaica.(I know i keep bringing it up) There isn't a dime of savings for the government to screw around with because nobody saves in that currency. Its a transactional currency, nothing more, nothing less.

Just like you I plan to cash out when Freegold arrives and the value of my stack is 55,000 $/oz in today's money.Maybe buy a few ranches and/or boats!Don't bother to work now so I will for sure not be bothering to work then!I think that Ryan's point in his reply to you may have been that Goldin the Freegold scenario will be THEpremier place to store wealth, at least this is what I understand fromthis blog, which implies that otherpotential investment areas will be less attractive. Now, I don't get that. I don't see how Gold at 55,000 $/oz will be stable enough inprice to constantly attract risk-free savers and perform like a T-Bill today but with zero currency risk.Like you I will take a large part of the massive real gains and look for the next 10-20 bagger!At this new price Gold has no more upside potential in real terms, it would seem, so other things should be more attractive whether you want a real yield or a capital gain.

Hi Anand,from your blog entry and your name I assume that you are indian living in India. Is it true that indians save in gold (almost exclusively/traditionally, some estimates even about 20000m/t)?

So how does it feel to live in such a "Freegold" country? Have you been to many other of such bad horrible bankrupt IMFS-countries?

According to some cult followers here it must be heaven on earth, the perfect superorganism. Justice, physical surplus and intellegent investments, whatsoever from and for everybody whereever you look...(at least I have the impression sometimes listening to the worshippers here)...What would be your personal reflection on that? Interesting to hear from somebody from freegold-superorganism-country.Looking forward & Greets, AD

P.S.and about you americans here on the blog, if you believe in freegold-superorganism-valhalla, why dont you take your next holiday in India.BUT: Please not in some Sheaton, Hilton or HolidayInn Resort, but rather in some rural area, maybe some Bed&Breakfast at some farmer.

"I think that Ryan's point in his reply to you may have been that Goldin the Freegold scenario will be THEpremier place to store wealth,"

I agree, that is freegold. But you cant feed yourself by storing wealth. If you want to be financially free(dont want to work)then you first need income producing assets. Giants and even little giants already have income producing assets so if the average guy front-runs freegold, he will be able to join the financially free by selling some of his gold to the giants who need it and buy income producing assets himself.

Something JR pasted above caught my eye:==================================Glimpsing the HereafterBut when the debtors are borrowing too much currency and consuming too much in the physical plane, there is a mechanism in Freegold that ultimately slows them down. That mechanism is the purchasing power of the currency. When the debtors are consuming too much they'll experience price inflation which will force them to consume less. So it is the purchasing power of the currency that regulates the debtors. ==================================

I thought this was an interesting statement, when considered in the context of the current Euro issues. I could see an argument that because both Greece and Germany are using the same currency, the balancing mechanism of Freegold will not work. The debtors are using the same currency as the savers, so price inflation is suppressed, and the debtors continue to pile on debt.

Yet, severing the link between the currency and the state is touted as a positive for the Euro.

This seems like a contradiction. Severing the link between the currency and the state prevents the government from printing for their own selfish purposes, but it also blocks a debtor country (with overgenerous social programs or overly restrictive labor laws) from the corrective mechanisms of a floating currency. You can't have both, but both are touted here. So what am I missing?

To provide the answers you seek to your inquiry would go against the idea, for some,of owning this noble metal in the first place...which is generational wealth. To use ANOTHER'S words "A day will come, sir, when no paper dollar will pry gold from your hands! In that day, you will be too smart for such foolishnes".

My plan: To pass along my modest pile of golden weath to my children, who will then (on anet basis) pass along a larger pile to their children, and so on...

My ancestors had neither the understanding nor foresight for these actions so it startshere...today...with me...for my family.

@AD

If the assessment of Aquilus is correct, and you are simply playing the Devil's Advocate, thenI take back my previoius comment with sincere apologies.

The briefest possible answer (from a mobile device) is that in the absence the devaluation adjustment mechanism upon their own sovereign currency, the internal adjustment to the debtor culture of the nation in question would function as follows.

The profligate government must be allowed to issue sovereign bonds on an as needed basis to the world market AT A MARKET RATE that reflects the very real likelihood of repayment default or haircut refinancing. Because the currency is part of a larger bloc that prevents local depreciation and the cultural austerity resulting from inflation of import prices, the imposed cultural austerity of less purchasing power must come in the form of the higher taxes imposed by the government as necessary to make headway paying the market's punitively high rates on the sovereign bonds.

The market is a remarkable agent for overall balance -- but only if the healing adjustments of mild default are permitted to run their course. And of course, when default reaches an earth-shattering epic scale, that's when it is vital that savers are safe in gold while systemic reset is allowed to play out through depreciation of the debt-laden culture's currency unit.

The name Devil's Advocate tends to imply some attempt at rational argument. Sadly we see very little of that from you. It's interesting that you cite India as an example of “Freegold” as opposed to “other of such bad horrible bankrupt IMFS-countries” (sic). Let’s take a look at how the $IMFS penalizes India.

As we all know India imports large quantities of gold. Under the $IMFS regime this gold is classed as non-monetary gold. It is treated as a commodity import like oil, wheat etc. Therefore it adds to India’s trade deficit.

As Michael Pettis is fond of saying “balance sheets must balance”. So in order to offset this trade deficit India has to import “capital”. This capital can be derived in several ways. For example it can come from remittances, foreign direct investment (FDI) or borrowing by the Indian government.

Under IMF rules gold held as a CB reserve asset can be used to settle debts with the IMF and, in certain circumstances, obligations between members of the IMF. In other words monetary gold is capital while non-monetary gold is merely a commodity. If these gold imports were recorded as capital inflows India’s trade deficit would be much lower. It would need less FDI, remittances or debt etc to reconcile its balance of payments (BOP).

Indians save much of the gold they import and do not consume it. As we have all heard so many times “you cannot eat gold”. I think a reasonable person would therefore conclude that the net gold imports to India (after deducting exports of fabricated gold) should be classed as an inward flow of capital.

So as a result of the distortion that the $IMFS places on international trade accounting we have this absurd situation where India is penalized for saving. Worse the FX market penalizes the Indian currency because the trade deficits are perceived as a negative for the currency. If the government borrows to balance the trade deficit there is also an interest expense that must be carried by the taxpayers of India.

After the transition to the Freegold-RPG regime India will not have to import any gold. A small outflow of “non-monetary” gold would cancel their trade deficit. Some of the benefits that would accrue to Indians include the following:

1. The money they are spending on gold could be spent on other goods that could improve their lives.

2. India would not need to encourage Indians living abroad to remit funds to India. So these folks could spend the funds, they are no longer remitting, on themselves.

3. India would not have to “sell off the farm” to attract FDI or pay interest on debt that is borrowed to offset a trade deficit.

4. The revaluation, through Freegold-RPG, of Indian gold savings (estimates range from 12,000 to 20,000 m/t) will create an enormous amount of spending power for capital investment and/or consumption. Hopefully they will use this opportunity to improve their lives.

Now AdvocatusIgnoramous we’ve had quite enough of the nonsense about cults and your references to the folks here as “worshippers”. Make some strong, rational arguments (if you have any) or get lost.

"of owning this noble metal in the first place...which is generational wealth."

Noble metal is for giants or wealthy that want to shuttle wealth generation to generation. These giants already own enough capital goods that they live off of. You are better off to pass on a good industrial building to your kids then a few ounces of gold. The kids can feed their families with it. If you own a few shopping malls, a few apartment complexes and a fleet of oil tankers then you want to accumulate gold with your excess to pass on to your family because even with your lavish lifestyle, you will have excess savings to store.

Get rich by front running freegold. There will always be wealthy that will pay top dollar for your gold so that you can stop working.

ChrisFlike most of us here you have probably never been so wealthy that you did not need to work. You also needed to consider retirement. Suppose you were wealthy?How would you deploy your wealth then? Would you really get back into the fiat rat race of risking capital to 'earn' return? Would you do this even if you were certain that gold would continue to be held as a value asset with very low likelihood of loss of purchasing power. Remember....risk is real...the risk you must take to get that '10-20 bagger' is real and will result in the loss of capital about 5 out of 6 times (depending on the 'risk free' rate. Might you not consider holding your wealth in gold and not deploying it among the scoundrels and low lifes who borrow and never repay or who start companies that only 'burn' capital and then fizzle?Most of us I suspect are stuck in that model but we do not have wealth 'large'. I know it is hard for me not to think of purchases right up to the limit of what a punctuation event might yield. I guess that no matter how much we feel rich it is a long long way to becoming a giant.

You have probably seen that Warren Buffet was bashing gold again, saying that productive assets will outperform it.

Apart from the fact that he neglects a possible tectonic shift in the IFMS, the funny thing is he is actually right.

There are quite solid empirical results that the long term average of the return on equity is about 6.5% annually in real terms. So far (well, it is empirical studies, and so the data are from the past because nobody knows the data from the future), so far it has not mattered whether it is public listed stocks or privately held companies, whether individual companies operate with leverage or not, and whether the overall economy grows or shrinks. Think about this. This is quite remarkable. The only downside is that you need to time frames of well over 30 years for all this to apply.

This raises the question of whether the situation will be any different after the change. If not, then you know what to do.

This raises the question of whether the situation will be any different after the change.

There is no question.

If Buffet can look at $PoG over the last decade and not see it as kicking the crap out of wall street, he is wrong from a $IMFS angle.

When $IMFS breaks and gold launches RPG style, equities will be on the other side of the fulcrum. So wrong there.

Which only leaves, as you say, after the change. And if you have been reading FOFOA, you would know that in Freegold, gold is not an investment vehicle. It is a store. A store which Buffet will happily sink his diminished assets into.

if post-transition, there is no reward for running a business, who do you thing is going to bake the bread? And grow the wheat? And sell the coffee to those freegolders who are getting lazy and start dishoarding? And earn a business revenue that allows him to earn a surplus from which he can bid for your gold?

The reward for running a business will be the profits gain by the business. Profits that will go back into the business or acquire gold.

They are are separate things. Of course a successful business will generate profits, and an unsuccessful one will not.

And if you are a saver you aren't going to put your profits at risk, when there is a perfectly good risk free way to save.

So saying that Buffet may be right is stupid since he isn't thinking in terms of RPG. And to ask those who do think in RPG if the situation will be different, there is no question. In Freegold, gold is not an investment.

I raised a brief question at the top of the thread that I don't think anyone has answered yet. Originally it was a longer question, but when Blogger ate my original post, I did not have the patience to write out everything again in long form. I am still skeptical of Blogger, but I think the question is important enough that I will take another stab at it, and this time save the text before I try to post.

The question is whether the U.S. Treasury's gold is a sufficiently deep pool to backstop the BBs, and whether it is available to forestall the onset of Freegold.

FOFOA has explained in A Classic Bank Run and in earlier posts that the CBs have stopped their policy of gold lending. And we all know that the FRB does not control the Treasury's gold stash. So that implies that there is a limited pool of gold out there, and that when that runs out Freegold will be upon us.

But what if the USG finds a way to use Treasury gold to backstop the BBs? Before someone says "But that would be illegal!" or "That would be bad policy!" let's stop and think for a moment. Treasury has the same mindset as the Fed, doesn't it? Geitner and others are all from the banking establishment. We know that they have not made good policy in the past, and are not likely to act responsibly going forward. We know that in times of crisis, the government does not always follow the rule of law. And we know from 2008 and from Another's sage warnings that the bankers will do anything to save the system. Does that include raiding the stash of gold in the U.S. Treasury if this option is open to them?

I don't want to come across as a conspiracy theorist, but based on what we know of what has already happened before, does anyone really think that there are any protections in place to keep it from happening? And if it did happen, do you ever think there would be a public announcement given the government's well publicized concerns about maintaining confidence?

In the long run, resorting to the U.S. Treasury stash would only be a temporary measure, one that would likely turn into a regular habit over a long period of time. But it would necessarily affect the timing of the emergence of Freegold, would it not? It would make the deepest of pools available to stave off a run. If the government avoids a run by using the Treasury's deep pool, the government could potentially maintain a semblance of confidence for a long time. This suggests that Freegold might not be an imminent event at all.

I am guessing this question has already been asked and answered, but I do not recall any recent discussion on this question. Most of what I remember focuses on official CB policy rather than the possibility of tapping the Treasury.

"The name Devil's Advocate tends to imply some attempt at rational argument."

Looking at this comment section, how many posts do adress explicitely the original FOFOA "superorganism" post? Not really that many. I agree that my post is not an argument, but reading the comment section, I say my post is one of the best at least to address the original post.There are different methods to tacle a thesis, arguments are just one. Another method is to apply it to some circumstance and see if it works. When talking about a superorganism like a huge independent country or society, I think India is just the most perfect example. (Personally I think much more reasonable than to beat a dead strawman with spiteful posts like about NorthKorea.)I agree with the details of what you are saying, but just pointing out those monetary external trade (side) issues, IMHO overall compared to the overall general economic and social issues I think those can be neglected regarding volume, when looking at the overall example of the Freegold-Superorganism India. Again, just IMHO.Greets, AD

Robert - as I understand it, the Bullion Banks have the legal option of forcing settlement in dollars. So there is no need to use treasury gold to backstop them, because the Fed can backstop them with cash.

Dr. Octagon, thank you for your reply. I do not know if such a legal option exists. But even if it does, exercising this option would signal the end of $IMFS, resulting in a tremendous loss to American prestige and influence, and not only for the government, but also for the biggest TBTF banks. Knowing what you know about Geithner, do you think Treasury is ready to let that happen? I think Treasury will do anything in its power (or even beyond its legal power) to avoid the dreaded scenario FOFOA referred to of the first Giant running out the front door of the bank screaming "The bank has no gold!"

Congratulations to Another/FOA for outlining the future for us all 14 year ago. Many thanks, brilliant.Now, from reading this site the timing of the 'transition' or 'great reset' to Freegold is getting closer but is still unknown, although the end result is more and more certain!As a poker player it strikes me that the 'pot odds' are extremely attractive and I am interested in buying way out-of-the-money call options on gold to make some large amounts of fiat for fun!I note that Dec 13 $4000 calls can be purchased @ 10-20 $/oz or approx. 1% of the current price.Obviously we will need to go outside Comex and deal directly with a counter-party to get a guarantee from that counter-party of a physical settlement.Anyone care to chime in on suggested optimum ways to make this type of play and with whom?My thinking is that an OTC deal with a major BB like UBS or JPM might be good. Perhaps with an actual producer? Size reasonable for a shrimp. Thanks in advance.

Robert - I think the US Treasury has more of an incentive to quietly leave the gold where it is. If a BB ran out of gold, that reflects badly on the BB, not on the US Treasury. The dollar is not a claim on gold, and the US government isn't responsible for broken promises of banks (outside of FDIC coverage), especially non-dollar promises. The Fed/Treasury can rescue the bank with cash, if it's too big to fail, to keep the bank solvent and the system going.

Opening up the Treasury's store of gold to *anyone* runs the risk that those with previous claims on that gold (pre-1971) will want in too.

"Apart from the fact that he neglects a possible tectonic shift in the IFMS, the funny thing is he is actually right."

Possible? Anything's possible. Try probable, Vic. And the scourge of Omaha would, like his sidekick Munger, neglect to point out the probable, as he is prone to being disingenuous-see his self serving comments about how the wealthy should be taxed.

If we believe Another, then the BIS would never allow the US to do what you are describing. They would step in front of the bullion bank creditors and hand the US $42/oz and say "thanks for the gold, took you long enough."

See the US is still in default of their past gold obligations. There is already a line a mile long still waiting for US gold. And since the BIS is apparently aware of all things gold, I doubt the US could perform an operation like you mention on the downlow.

"Worldwide, an incredible tower of debt has been under construction since President Nixon's 1971 default on the gold obligations of the US government. His decree severed the redeemability of the dollar for gold and thus eliminated the extinguisher of debt. Debt has been growing exponentially everywhere since then. Debt is backed with debt, based on debt, dependent on debt and leveraged with yet more debt. For example, today it is possible to buy a bond (i.e., lend money) on margin (i.e., with borrowed money).

The time is now fast approaching when all debt will be defaulted on. In our perverse monetary system, one party's debt is another's "money." A debtor's default will impact the creditor (who is usually also a debtor to yet other creditors), causing him to default, and so on. When this begins in earnest, it will wipe out the banking system and thus everyone's "money." The paper currencies will not survive this.

Permanent gold backwardation leading to the withdrawal of the gold bid on the dollar is the inevitable result of the debt collapse. Governments and other borrowers have long since passed the point where they can amortize their debts. Now they merely "roll" the debt and the interest as they come due.

Gold owners, like everyone else, will watch this happen. If government bond holders sell their securities in response to this crisis, they will only receive paper backed by that same government and its bonds. But the gold owner has the power to withdraw his bid on paper altogether. When that happens, there will be an irreconcilable schism between gold and paper, with real goods and services taking the side of gold. And in a process that should play out within a few months once it gets started, paper money will no longer have any value."

Jeff,I am already all in with physical. Amlooking at an additional highly leveraged play for thrills and fun aswe approach the expected Freegold endgame which whenever I read this site is more and more obviously a no-brainer .... touch wood.

Robert LeRoy Parker, I took your advice and reread Confiscation Anatomy again. I can see your point that any official publicly disclosed policy would cause a lot of problems, and probably make such a plan unworkable. But that is precisely why I suggested that this would be a classified program that none of us is ever supposed to find out about. The key question is whether it would be possible to keep it from the BIS. With the assumption that the BIS is a clearing mechanism for central banks (is this all it is?), I would think that the workaround would be to implement the program by bypassing the USFRB. As FOFOA noted, external auditors have never audited the Treasury's stash since 1971. Isn't the whole reason for the secrecy to make it impossible to know for certain what the Treasury has and which governments or entities can make claims on what it has? If there is no audit, and Treasury is directly backstopping one or more BBs without channeling through the FRB, how would the BIS know? You suggest that they know all things gold, but do they really? I honestly do not know. And aren't the claims stale after 40 years? That is more of a legal question, and I think the answer is probably not very clear.

My eyes seem to glaze over when reading about all the paper shuffling that goes on in the world. I don't even attempt to understand it all because I already have a pretty good idea how it's going to end. I just work in the short term and stack lead and gold for the long term.

Anyway, I thought this might be a topic for discussion for some of the pros who frequent this blog.

I suppose the question is: will the US take that chance? The potential encirclement of blowback could be severe to say the least. Do the benefits of delay outweigh the consequences of blowback and gold lost?

---

Does the BIS really know all things gold? Of course I couldn't say for sure, but I know they know a lot, and that Another sure seemed to know more than anybody else. The BIS have had a monthly meeting on "gold and foreign exchange" for over 30 years. They are heavily involved with all central bank gold activity. If a giant supply of physical bailed out the bullion banks I think they would have a pretty good idea about it. Identifying the culprit would probably entail a simple process of elimination based on their data.

Victorthecleaner has written an OUTSTANDING dissertation called The Many Values of Gold! It is so impressive that I have added it to my sidebar links as Victor's (Freegold) Summary.

Great job, Victor! Had I known what you were working on… ;)

Here are a few highlights, but go read the whole thing:

The solution is now also quite obvious:

Never denominate credit in a weight of gold.

More precisely, one has to avoid that any of the credit that circulates as currency, i.e. that is accepted as payment, is denominated in a weight of gold.

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The press release showed that gold was traded in the same fashion as a foreign currency in the Over The Counter (OTC) market between the major banks and bullion trading houses, completely analogous to, say, eurodollars.

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We have, of course, heard this story before in Sections 6 and 7. This is yet another flavour of paper gold. The unallocated accounts are a form of bank credit denominated in a weight of gold. At the margin and as long as there is confidence in the London gold market, both bank credit and physical gold trade at the same price. One is, however, the tangible asset free of counterparty risk that serves well as a store of value in the long run whereas the other one is merely another form of bank credit. The only difference to the historical gold standard is that the unit of the unallocated gold accounts is no longer the official currency of the United States. The other aspects are completely analogous though.

Before we delve into the matter in greater detail, let us contrast the situation with the eurodollar market which is just a government fiat currency traded by non-US banks as a foreign currency. If there is a loss of confidence and depositors withdraw their eurodollar balances, this run on the eurodollars has the potential to cause a serious credit crunch. Thanks to the fact that the US dollar is a fiat currency and no longer equal to a weight of gold, the Federal Reserve can always avert a bank run on the eurodollar market simply by providing the relevant non-US banks with ample liquidity in the form of currency swaps. So the fiat money does not have the same intrinsic instability as the gold standard. The price to pay for this advantage is the fact that the Federal Reserve may have to increase the monetary base in order to re-liquify the eurodollar market. The London gold market, however, suffers from the intrinsic instability of the gold standard simply because no government department can create additional gold in order to provide liquidity to the market.

-----------

Hooray! Above Victor harks back to our first email exchange of almost a year ago which I posted as Via Email:

"Think about it this way. Think about Eurodollars. Think about European banks outside of the Federal Reserve System making dollar denominated loans or simply issuing dollar liabilities to FX traders. Sure they have a few physical dollars in reserve. But they don't have direct access to the Fed lending facilities. So if they find themselves short on reserves, they will have to go into the market to buy some dollars, just as you say. Which, in aggregate, could drive up the price of the dollar versus the euro. Which is why Ben arranged a $500B currency swap in 2009. To keep the dollar from spiking. Unfortunately, though, Mother Nature is not quite as accommodating as the Bernank."

Although gold is no longer the official currency of the United States, it still exists as an independent currency in the OTC market between the banks and bullion trading houses, a currency that is managed in a fashion completely analogous to a foreign currency: with tangible cash, account balances, the creation of credit, lending, debt, swaps, forward and futures contracts, and so on. Since this currency uses bank credit denominated in a weight of physical gold, it shares the major deficiencies of the historic gold standard:

■If the banking system creates credit, this leads to physical gold trading at a discount to its intrinsic value.

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We suspect that a large part of the present global trade imbalances are a consequence of the practice that international trade accounts are not balanced by a flow of physical gold as it was the custom during the gold standard before World War I, but rather offset by an opposite balance in the capital account.

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As a disclaimer, we should add that we have above focused on the official gold reserves only to illustrate the magnitude of the imbalances. What matters in a real world scenario in which trade balances are settled in gold, is also (and in the long run: primarily) the gold held by private entities, i.e. companies and individual savers.

-----------

This gives an estimate of US$ 32700 per ounce for the free gold price. Of course, a run on the LBMA would have its own dynamics, and most international trade balances are still not yet settled in gold.

Finally, combining both estimates, we get a rather rough picture of the present physical bullion reserve of the LBMA instiutions: between 80 tonnes (with our low estimate of 1500 tonnes in open interest) and 290 tonnes (with 5500 tonnes).

we know (via Reginald Howe and the CEO of Lonmin) that Edward George said that immediately after the Washington Agreement in 1999, "the BoE and the Fed were very active in getting the price of gold under control" (from memory).

We also know that the Fed and the BoE had gold swaps in 1982 - GATA found some UN document a couple of weeks ago.

So the Fed has some gold operations going on. Whether these are outright sales or leases, no idea.

I have thought a long time about the aggregate position of the BBs and everything would fit together a lot better if there was a large physical seller, say 3000 tonnes+ since 2001.

A couple of ideas:* could the Fed or the ESF perhaps be leasing gold to the BBs to help them manage their reserves?* is the Fed or the ESF perhaps short the foreward (same purpose)?* did the US make sure some other gold came to the market? Iraq? Libya? Do we know all their gold is accounted for?

one further thought. Even if the US had secretly sold some gold (well, they would have given away the physical and received paper instead or something like this), and the BIS knew it, why not?

I am not a big friend of GATA's interpretation of what is happening, but doesn't the 10-year chart of gold in US$ look 'mananged'? Perhaps there exists some secret deal about how to phase out the US$? If there was a way of preventing the biggest chaos from happening, wouldn't the other CBs consider such a 'deal'.

Further, erebus wrote in the NeuralNetWriter forum

Quote:

Motley Fool said...VtCI cannot imagine the USM machine operating on Hyperinflationary fumes or a decade. Could you share your thoughts as to how this would be possible? TFFebruary 7, 2012 10:54 AM

Actually, as A/FOA taught, the HI happened more than a decade ago. Plenty of mayhem since, wouldn't you agree? So I suggest that maybe you meant to ask: "Can the USM machine keep operating on Hyperinflationary fumes for another decade?"

The elite weren't and aren't blind and deaf to the HI warning lights and alarms. They're not stupid now, and they weren't a decade or two ago. They saw the same things A/FOA saw long before A/FOA appeared, and they positioned themselves to deal with the challenges. To my eye, the American elite gave the world (and maybe A/FOA themselves) a lesson on how to remain the world's only super power during Hyper-Inflationary times.

I think all the right people noticed. Wouldn't you agree?

Erebus

The US must have know since 1981/2 what would be the price to pay eventually.

Nickel,

I did not realyy do anything about that blog - never had that much time. I just selected one of the really simple themes they offer. It is my impression that Wordpress is substantially better than blogger, but that you know only with hindsight.

Is the reclassification of the US gold stocks to "Deep Storage" and "Working Stock" relevant in your discussions? FOA did touch on this on the trail here, about a quarter of the way down the page.

Combine his words with a 2007 press release from the LBMA regarding some bars from deep storage not meeting LGD standards for physical appearance due to "surface cavities, cracks, holes or blisters" and suspicions arising that these defects may be attributable to higher base metal content (the insinuation being "coin melt") and you may have some reason to believe the US has already been shipping its gold...maybe...

The "tungsten" story may be related or simple BS, who knows...not me for sure.

I agree that this probably indicates very old bars. But I don't think they can pass coin melt for LGD. The US coin melt is basically the old coins from circulation melted down without refining - perhaps some 90% gold content. Labelling this as LGD would be fraud and would be discovered (if not already obvious from the colour) then because some of these bars will eventually end up at the jewellers'.

I searched 'deep storage' and 'working stock' with no luck. Which comment number are you refering to?

I doubt the tungsten story has anything to do with that press release. But it is concerning that such impurities are in the metal and the LBMA required recasting isn't surprising.

As for a mystery physical supplier, how about the IMF rather than the US Treasury. I understand IMF sales require an 85% member vote and certain gold from pre-late 70s is off the table because of repatriation claims, but their gold sales in 99 and 2009 happened to occur shortly after major events at the LBMA. Additionally, the gold sales to help poor countries alibi stinks. The timing is too coincidental imo.

FOA explained the 1999 sale as an accounting trick for the IMF to revalue gold, but imo it seemed like even he didn't really know the full story.

Would it be easier for the IMF to bailout the LBMA than the US? I'm not really sure. This discussion is getting beyond my scope of understanding. Maybe Andrew Maguire knows /sarcasm.

You might consider contacting the folks at (such sites as) 321gold, financialsense, safehaven, and, yes, ZH, and see if they would, at the very least, place a link up to your Many Values of Gold piece.

It is true that GATA stuck with the Howe/Turk interpretation of the West Point reclassification and ESF gold swaps all these years. That the US Treasury deployed actual physical official US gold in Europe to bail out the bullion banks and suppress the price of gold (which incidentally left the launch pad and never looked back less than a year later). But that was never FOA's interpretation.

We are dealing with two different paradigmatic views of the world of gold and central banking. One says that it's all the CB's versus gold and the gold investor. The other is the paradigm explained by Another. Try to view each in its own light. Confusing, mixing and jumbling them together to create some sort of reconciliation may lead to a confused, mixed up and jumbled analysis.

"It is the mark of an educated mind to be able to entertain a thought without accepting it."-Aristotle (384 BC – 322 BC)

elevator guy (04/23/01; 00:07:49MT - usagold.com msg#: 52371)second thoughts------ I seem to be caught in an internally conflicted spiral of wealth logic, due to my having grown up in Dollar Land. When some prominent poster here said that GATA was "barking up the wrong tree", I felt GATA had been given short shrift for their efforts. Now ----------------

Hello Elevator guy,

Thanks for attempting to understand it all. If you follow our lead, we will not change your mind about anything. Rather, you will have the "luxury" of seeing things in a different context from the usual Western Gold Bug fixation. With that perception becoming part of your "Total" overall understanding, as events occur, you may choose to interpret their impact differently.

I suspect the gold in West Point was reclassified in a show of good faith to those that own some international gold paper. I'm talking about people whose reasonably priced product you cannot live without. I doubt the gold has outright swaps written against it or was swapped into the enemy's camp (so to speak). While the ESF has the right to trade currency swaps against other's gold (and they do do this). Our gold has yet to be possessed by others. Just as in 1971, when many dollar holders thought US gold was "in custody" for them, so too does the current world dollar gold markets. However, this open certification shows just how tight the system has become.

We have said for some time that the dollar faction has inflated paper gold and done so with very limited actual bullion of their own. We maintain that most of the leverage created in this arena has been done with the gold of private Western owners. Modern GoldBug owners that once held physical gold but now seek gold leverage and gold industry investment instead of gold wealth. That gold has now been leveraged for all its worth as it filled the use void. Today, we are reaching the mathematical end that that game can be played. Others know this and the West Point business is an attempt to counter this perception. Even if it was only a political move. We are getting close though (smile).

There is no logic in that the Bundesbank would risk its gold. They were major supports of the Washington Agreement. Counter to perception, the entire EuroZone CB system awaits the day when they can convert failed paper gold borrowers into Euro borrows. As our paper gold market fails to function, shuts down and physical gold soars, there will be no bookkeeping market to offload these paper positions into. The conversion ratio into Euros will then be something to behold. Along with the demand for currency Euros and physical gold! The BIS/ECB is delighted that the dollar faction is lending all the "gold on paper" the dollar market can stand. Eventually, the US will walk right up to the gold window with the intentions of selling, only to fall away as they stare at a mountain of foreign CB dollars.

"""We watch this new gold market together, yes?"""

ThanksTrailGuide

Some of you may never have "caught" that Pierre and Henri in FOA's analogy were James Turk and Reg Howe. And the mysterious fish was their "catch" regarding the ESF swap and US gold reclassification. This catch was named by GATA and that name has stuck. But someday (when Freegold arrives) we may find that we were using the wrong name all along.

,,,,,,,Two French men were fishing in a boat, just off of Nice. Several other boats were within close sight, always watching to see if these guys found anything. All of a sudden Henri hooks a huge one and brings it to the surface while Pierre nets it. Both of them look at the fish in the net and hesitate, not wanting to bring it onboard. "What is it", Henri asks? "I don't know, can't make it out, but it's a good one, I'm sure" says Pierre. By god, whatever you do, don't haul it in. If we can't name it the other boats will laugh at us. Let's just keep the net in the water, pointing at it and talking loud while we circle the boat. Eventually, one of the other boats will get a look and blurt out its name,,,,,,,,,,,,,

,,,,,,, Eventually, the ruckus attracted hundreds of other boats (the miracle of marine radio and the internet) and they stormed in close to see the news. During all this action, none of the other boats saw the fish very well, therefore no identifying name was mentioned. Eventually, tired from throwing out various possibilities of the significance of the catch, Perre and Henri pulled the thing in for all to see.,,,,,,

,,,,,, To their amazement, no one else knew the exact name or significance of this exceptionally fine fish! You see, there just wasn't enough details about it, "floating around" (smile) to know its purpose. But still, all hailed the duo as superior fishermen and brought them drinks and dinner in port!,,,,,,,,

The moral of this story: In this game of life, we all fish from time to time. But, to a sportsman, the size or type doesn't matter because it's the art of catching that counts. Besides, every catch has a name and we will eventually find its "namer". (bigger smile)

And what actually happened is that the USA transferred ownership (on paper) of the gold at west point to the Saudis, but will hold on to it for them in the mean time. In reality however, the US will simply default and keep the gold when the bill comes due. [How would that fit in with the US being a golden outlaw and lacking AAA credibility when it comes to gold? Why would the Saudi's agree to this?]

So where does this fit in with Victor's theory of a large physical supplier keeping the bullion banks solvent? Are you saying that the US Treasury is using the exchange stabilization fund to do this? Wouldn't that be reflected in more title changes of US gold? Do you find Victor's theory plausible?

My intention was to offer a FOFOA comment that touched on the issue of the Reclassification of West Point gold.

And more broadly, to introduce what I think is the huge conceptual idea you must keep in mind wehn you look at this - there is a cavernous divide here in some regards:

It is true that GATA stuck with the Howe/Turk interpretation of the West Point reclassification and ESF gold swaps all these years. That the US Treasury deployed actual physical official US gold in Europe to bail out the bullion banks and suppress the price of gold (which incidentally left the launch pad and never looked back less than a year later). But that was never FOA's interpretation.

We are dealing with two different paradigmatic views of the world of gold and central banking. One says that it's all the CB's versus gold and the gold investor. The other is the paradigm explained by Another. Try to view each in its own light.

I believe your posts demonstrate gold supply came/comes from private stock of Western orgins. Dishoarding of private stock in the 80s/90s coming from a lower or stable dollar price signifying (in the minds of investors) that is was not the "place to be" for returns. Now, in the 2000s, dishoarding coming from the rising price which is coaxing new gold out of the hands of private parties for whatever reason (bubble talk, "profit" taking, etc). It seems the Western public is just searching for an excuse to sell their gold.Now, I believe ANOTHER wrote that as the price of gold increases, supply dries up. I'm assuming his reference was to physical supply. Then there is FOA's comment that "both systems will strive for a higher currency price for gold; one doing it because they have to; the other doing it because they want to". I'm making the assumption that the US is the one having to strive for a higher price for gold. It is FOAs comment that I'm having trouble understanding. Would there be any other reason for the US striving for a higher price of gold besides an attempt to coax new stock from private hands? Or maybe inticing new dollars into "gold-colored" securities (Ari-Investments perhaps:)) while dismissing the virtue of physical coins?

My other question (I think) relating to this. Why rename the US gold stock at all? Was this just a name change to show some acknowledgement of what lies ahead? Or could this open up some avenues or flexibilty with respect to the management of the stock?

I know the information I seek is probably somewhere in the archives of usagold or fofoa and I have some more searching to do so, please, be kind :)

I just read the 2001 piece by James Turk - I did not know it since that was before my time.

We know that the Bundesbank never had more than 10% of their gold on lease (roughly 1997-2004?). Presently they have zero on lease according to their own press statement. So the Bundesbank connection claimed by Turk is false. Sure, he got that one totally wrong, but how about the other aspects?

We know the Fed did have gold swaps with the BoE in 1982 (some UN documents also found by GATA). Also, the US have a track record of using the BoE as a front for their own gold operations - think of the London Gold Pool and how that was eventually suspended.

I think FOA basically said that if people see the US sell or lease their gold, they will immediately want some of the US gold, too. If they see some non-US CB sell or lease gold, they would say, yes, perhaps the US are right that gold is no longer important. I basically agree with this argument, but I am not sure this rules out using the BoE as a cover.

I have a couple of questions:(1) What is the exact meaning of 'custodial gold' in the 2001 reclassification? Is it obvious this gold is not being used in leasing or swap operations? The timing, April 2001, would be very telling indeed.(2) In which form of bars is the foreign CB gold stored in New York? In 400oz LGD bars or 100oz COMEX type bars? How about the West Point and the Fort Knox gold?

Finally, on the role of the IMF. I think from all we have seen so far, it would be typical that someone who wants to support the BBs would first lease some gold and transfer the physical in the process. Later, when it turns out the BBs cannot return it, the CB officially sells it. But in reality, it was long gone. So the timing of the IMF sales matches this pattern. What I don't know is if the IMF could lease some gold during the peak of the crisis (only to officially sell it later) without getting an official vote or something like this.

Something similar might have happened in early 1999. The US and the UK pushed for the IMF to sell some gold (they said in order to fund debt relief for some poor countries). Then this did not go ahead because of some issues in Congress. Then, suddenly the UK stepped in with their own gold.

Finally, if suddenly poor quality 400oz bars show up - I read this as very old bars - this might indicate that indeed the BoE is acting (with some of their own centuries old gold) on someone else's behalf.

"Now, in the 2000s, dishoarding coming from the rising price which is coaxing new gold out of the hands of private parties for whatever reason (bubble talk, "profit" taking, etc). It seems the Western public is just searching for an excuse to sell their gold."

Or maybe even more the Western public is searching for paper gains. Thus we see the importance of faith/belief in paper gold and promise of MOAR paper gains. Maybe we think of it as credibility inflation in paper gold, yes?

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"Now, I believe ANOTHER wrote that as the price of gold increases, supply dries up."

He did, but existing supply and mine flow is also "stretched" inc currency terms. People don't buy gold by weight per se, like you would with a commodity, like if you needed x tons of steel. With gold you are storing wealth, and investing excess production (currency) into whatever gold that gets your.

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"It is FOAs comment that I'm having trouble understanding."

Me too. Methinks a mind like that knows what clarity looks like, and he chose an ambiguous path. If so, there must be a reason, no?

I still owe you a reply to your 2-part posting of February 9, 2012 4:54 AM (comments to the previous FOFOA article). You wrote

Working with the official figure of 170,000 metric tonnes in existence, we know the following. Around 30,000 tonnes is on CB books officially; the various funds (GLD, goldmoney, etc) hold perhaps 10,000 tonnes; Comex has about 12 million ounces (370 tonnes Registered + Eligible), the OTC market is opaque; and the remainder is in private hands.

The last two items are the most difficult, but let us say of the 130,000 tonnes comprising this category that 30,000 tonnes resides in the OTC markets, and that the remaining 100,000 tonnes is in private hands.

The last 100,000 tonnes is interesting in that essentially it is not liable to multiple paper claims. Which leaves 70,000 tonnes for our consideration.

What follows is mere speculation on my part.

I would say the OTC market is covered at a 100-to-1 ratio ( a number uncovered by GATA and in line with the multiples for other commodities in this market).

The CB gold is likely at a lower PGR of perhaps 10.

Finally the visible gold market (controlled by the BB's) has a likely PGR of 20.

This is remarkably close to the calculation provided by Another on the COMEX, if done lately.

and later

It must be mentioned that the PGR is in the current semi-functional system where gold is nearly universally hated. A change to a FreeGold system would alter this mentality drastically, meaning a much greater demand for physical, translating into a further multiple of the current PGR.

I fully agree with the latter part. Even if we correctly estimate the leverage in the OTC market, the change in function would have an effect on top of that leverage. A factor of 2-5 looks plausible to me, probably initially quite some overshooting and later, once the new financial system is up and running and the banking system has found a new way of working with less leverage and almost no consumer credit, then even quite some decline, perhaps by 50% or more.

Concerning the first part, you assumed a leverage of 1:100 at the LBMA and got a price increase by a factor of 20. I think this is not consistent.

If you just use Another's estimate, you get a factor of 19, but only on the LBMA part. At LBMA there is no factor 100.

Also, all the privately held physical gold is taken out of the estimate. The price is set at the margin, i.e. where credit gold is allocated (and people deposit physical for bank credit - well, theoretically - in real life nobody is that stupid), and this is the OTC market.

Your argument is of the type: There is 130000 tonnes of gold and X wealth to be stored. Now if all this wealth was evenly distributed over the existing amount of gold, each ounce would be worth such-and-such much wealth. I think this is not how a price is discovered because what matters for price discovery is only the amount of gold that is for sale and only the amount of currency that wants to buy gold.

I have not read nearly enough to speculate on what may have happened in the past. You all know much more gold history than I do. Whether supplies have come from the UST or elsewhere, the critical question to me is the likelihood of somehow using UST gold in the future "to save the system" as a matter of "national security" -- even if that means breaking the law and covering it up.

To my eyes it looks like the foxes are guarding the henhouse. Sure there is a risk that the BIS would try to stop it, or that others might renew old demands or make new demands if it ever became known that the UST was making gold available to the market again. But from everything we have learned since the 2008 crisis, it seems to me that the foxes wouldn't hesitate for a New York minute to take the risks and deal with the potential consequences later.

After all, anything it takes to save the system, right? Is that not the way the banking establishment thinks?

Ok. So you think my speculation is wrong, and see it as 20 across the board. I can live with that. :P

Your other comment is valid as well. One should rather be looking at paper versus marginal flow gold. But. That makes me wonder. How much of the 170,000 tonnes could be said to be marginal gold?

Of the private 100,000 tonnes perhaps 5000 (and that is very generous)? Of the CB gold, none (since they are buying)? Official market gold, perhaps half, say 5000 tonnes (being generous again). Of the OTC 30,000? All of it?

That would make 40,000 tonnes, which seems waaay too high, but still less than a 1/4 of the 170,000 I used, and hence driving up leverage by a factor exceeding 4.

What are your thoughts? How much of the stock could we estimate to be flow(able)?

As of early 2008, the Fed’s vault contained roughly216 million troy ounces of gold (1 troy oz. is 1.1 timesas heavy as the avoirdupois ounce, with which we aremore familiar), representing about 22 percent of theworld’s official monetary gold reserves. At the time, thevault’s gold value was about $9.1 billion at the officialU.S. government price of $42.2222 per troy ounce, orabout $194 billion at the market price of $900 an ounce.At the current official U.S. government price, one of thevault’s gold bars (approximately 27.4 pounds) is valuedat about $17,000. At a $900 market price, the same baris worth about $360,000.

Black-Scholes was introduced in 1973 and the first gold futures contract was introduced in 1974. I wonder in Black-Scholes was a creation of the $IMFS..It seemed like a convenient time to have a monopoly on derivatives pricing.

Scholes went on to create a greatly successful hedge fund named LONG TERM CAPITAL MANAGEMENT.

Gold futures are relatively new (1973) because before 1973 nobody in the US was allowed to own gold or, even earlier, gold was currency, and so there was no need for gold futures.

The origin of the futures market is that of agricultural commodities, say kettle or wheat. The purpose of the futures market is to allow the producers to hedge their harvest/production and to allow the storage facilities to manage their inventory. This is a part of the market that is very close to the real economy. This showed up even through the MF Global collapse - many who lost their cash were not speculators, but rather farmers who used the futures in order to hedge their price risk.

Now Black Scholes is about options, not futures. But even options (on agricultural products) are a very old idea. I think even in a new gold-based financial system, both futures and options will be present, and Black-Scholes will be, too.

The connection to LTCM is quite funny, but I think it has a lot to do with reckless high-leverage speculation, but little with Scholes' academic work. One factor was perhaps that they wanted to print his name on their business card to make their operation look more impressive. Scholes was not very choosey as you can see from his CV. Perhaps he just wanted to get as rich as all the traders. Who knows.

I am aware that futures and options have been around since the 1600's. But Black-Scholes became the dominant equation. And it all came together at that time when gold went from money to commodity. I personally think that the LTCM collapse looks good on the monetarists and the Chicago school who came up with Black-Scholes. It led to the Greespan put. These guys are not our friends.

Can you confirm 'chief counsel'? I just remember he was (one of) the lawyer(s) who negotiated the bailout.

He actually said something along the lines of "LTCM was never short gold". The rumour had been that they were short 400 tonnes at that time - perhaps the true reason for the Fed sponsored bailout. But I think I remember Another alluded to the case a couple of weeks in advance ("we are going to see a paper gold default") and basically said they were short the unallocated.

The Rickards statement is somewhere in the papers on the Reginald Howe versus BIS case (another one of these ironic cases of picking the wrong enemy).

Sometimes you think GATA might be a front of the Fed/USG/BBs just in order to distract from the true issues.

I don't think anyone who actually trades options, uses the Black-Scholes formula much. This is because it models European options, but the ones that are traded are predominantly American options (except SPX which has European ones I think).

Also if you are making a market for options, you can see whether there is some arbitrage opportunity and lock it in even without knowing Black-Scholes. In fact, the underlying is usually not a random walk, and still the market makers not only make the market, but they make some money, too. So they can price options even if Black-Scholes is not valid. In fact, they were able to do this even before Black-Scholes did their academic work.

Yeah, as the g.c. he was the corporation's chief lawyer and in charge of overseeing the corporations legal issues, which included its legal dealings with its creditors and the USG to resolve the entity's insolvency and avoid a bankruptcy filing and asset liquidation. LTCM's collapse was generally about its inability to meets its contractual obligations to its creditors, which were governed by US law. So lawyers were all over it, like they are in any other breach of contract dispute.

Check out this link for the amazingly breathtaking Starling Murmuration video.

The closest fit to equations describing starling flock patterns come from the literature of “criticality,” of crystal formation and avalanches — systems poised on the brink, capable of near-instantaneous transformation.

Also consider this interview from the Legendary James Dines who talks about Murmuration in the mass human mind going on right now.

He says:

The world is in a rough period right now and it’s because of what I call a murmuration. This is a subsection of my work on mass psychology. The whole world is now in a murmuration. It’s happening, for example, in these riots worldwide, the street demonstrations and the revolutions. What’s going on is there’s something disturbing humanity. It’s disturbing the mass mind of humanity on this planet. I think it’s the currencies. People simply cannot live on what they are earning. It’s the government printing more paper (money) than actual wealth is being created.

This whole concept seems to tie in with the Super-organism theme of FOFOA's post, where the collective intelligence is far greater than the individual intelligence of a single ant.

Concerning possible gold trading by the US government, I have a following question.

Mortymer alerted me to some documents from the BoE that they offered not only "gold loco swaps", but also "gold quality swaps":

http://archive.treasury.gov.uk/docs/2001/eea2802_glossary.html

Gold loco swapexchange of gold in one location for gold in another location with a commitment to reverse the exchange at some specified future date.

Gold quality swapexchange of gold of one delivery standard (purity) for gold of another delivery standard with a commitment to reverse the exchange at some specified future date.

It is clear what a gold loco swap with the BoE is good for. If you are a CB and you urgently need to trade in London, but don't have any of your own gold there, the BoE can swap you some and you can sell it immediately.

Now who is the prime suspect for a gold quality swap? It must be some CB that don't have their gold available in LGD bars in London, but rather in other bars (100oz COMEX) or in lower fineness. Coin melt? Who is world famous for having a huge amount of coin melt in the vault?

Alright. Then you google and you find this:

http://news.goldseek.com/GoldSeek/1321292580.php

Now suppress your gut feelings for a minute and do read this although it is Kirby.

My question is: Why was gold swapped during the Iran hostage crisis, and why did they apparently need to use a "quality" swap. Can someone teach me the relevant history lesson? Dismissing Kirby as nuts is one thing. But then we still need a consistent interpretation of what happened, don't we?

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